Sunday, August 7, 2011

The Minimum Wage Can Create Jobs

My public economics master thesis at Maastricht. Its a 53-page text which empirically examines the employment-effects of the state-wide minimum wage in the US. Because the topic is controversial, I spent months making sure the econometrics are right. Now its regressions are pretty much bulletproof.

In 1994 and 2000, Card and Krueger found a positive relationship between minimum wages and fast-food employment in their region. What if you would test the entire hourly-wage-earning US labor market (non-salarial hourly wages for those of you outside of the US)? In fact, you would find that on average an increase in the minimum wage leads to an increase in employment at minimum wages in the US. Want to know why? Simple... because of income and demand-effects.

Well okay, its not that simple. It turns out that if the state's job market depends on the manufacturing industry, then they might lose jobs by raising the minimum wage, but if that state depends rather on the service industry, then they gain employment. This is because while there is an income-demand effect as well as employment-cost effect, one effect is always bigger than the other. In the end it all comes down to Substitutability (you can't replace all workers with machines, only some of them), and Tradability (You can't import your haircut or your burger from China).

Abstract

This paper investigates the effect of US statewide minimum wages on labor markets. The effect of sectoral composition of a state’s economy is empirically determined to have a pivotal effect on wage-earning employment elasticity using 2002-2007 BLS data. The explanation behind this phenomenon is linked theoretically to tradability as well as capital/labor substitution elasticity. The effect of statewide minimum wages on a state’s labor market is explained empirically by a state economy’s sectoral profile.

About the Author:Max Berre is an economist at the EDHEC-Risk Institute (Ecole Des Hautes Etudes Commerciales du Nord) who has worked as a sovereign debt expert at the Inter-American Development Bank in Washington and has taught financial economics at Maastricht University in the Netherlands.